Earnings per share

What it means

EPS, earnings per share, is the net profit attributable to holders of ordinary shares divided by the number of shares. If a company earns 10 million euros and has 5 million shares, EPS is 2 euros. It shows how much profit corresponds to each share an investor holds.

It is a core measure for listed companies and feeds into the P/E ratio, which compares the share price with earnings per share. Investors watch mainly the trend in EPS and whether the company meets or beats analysts' expectations.

There is basic and diluted EPS. Diluted EPS takes into account that employee options, convertible bonds or warrants may increase the number of shares in future, so it is usually lower. For companies with generous option plans, the difference can be significant.

How it works in practice

In the calculation, preference dividends are deducted from net profit because they do not belong to ordinary shareholders. The number of shares is a weighted average for the period, to reflect new share issues or buybacks during the year.

Companies listed on a stock exchange report EPS in the income statement under IFRS. Small limited companies do not calculate it because they have no shares, but the idea of profit per ownership interest is used when valuing interests or comparing members' returns.

Share buybacks reduce the number of shares and so raise EPS even if total profit does not change. Investors therefore check whether EPS growth comes from business growth or merely from financial transactions, and compare it with the trend in revenue and dividends.

What to watch out for

One-off gains or losses, for example from selling a division or writing off goodwill, can distort EPS. Analysts therefore often use adjusted EPS excluding exceptional items, but each company defines it differently, so read what exactly was excluded.

Comparing EPS between companies on its own makes no sense, because it depends on the number of shares. A share with EPS of 10 euros is not better than one with EPS of 1 euro; the ratio to the share price and the rate of profit growth decide.